Federal Solar Tax Credit for Homeowners
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The solar investment tax credit (ITC), or federal solar tax credit, is one of the most significant incentives for homeowners looking to switch to solar energy. This credit helps offset the initial cost of a solar system by allowing you to claim 30% of the total cost of your solar installation on your federal taxes.
We have researched and analyzed the top solar installation companies in the United States. In doing so, we examined solar incentives, including tax credits, rebates, and net-metering benefits. This guide will help you understand how the federal solar tax credit makes your solar installation more cost-efficient, as well as whether or not you qualify.
What Is the Federal Solar Tax Credit?
The federal residential solar energy credit is a tax credit you can claim on your federal income taxes. It is not a tax deduction that reduces your taxable income but rather the amount of money you owe in taxes. Your solar power system must be installed during the tax year and generate electricity for a home located in the United States. This credit applies to the cost of a solar photovoltaic (PV) system. There is no maximum amount that you can claim.
The federal tax credit will continue to reduce each year, so it’s best to invest in a solar panel system as soon as you can. Here’s the current plan as of August 2022:
| Year of Solar Project Installation | Federal Solar Tax Credit Rate |
|---|---|
|
2022–2032 |
30% |
|
2033 |
26% |
|
2034 |
22% |
|
2035 |
No longer available |
Am I Eligible for the Federal Solar Tax Credit?
According to the Office of Energy Efficiency & Renewable Energy (EERE), the following criteria determines your eligibility to claim the federal solar tax credit:
- Date of installation: Your solar PV system is installed between January 1, 2006, and December 31, 2034.
- Original installation: The solar PV system is new or being used for the first time. The credit can be claimed only on the original installation of solar equipment.
- Location: The solar PV system is located at your primary residence or secondary home in the United States. It can also be for an off-site community solar project if the electricity generated is credited against your home’s electricity consumption and does not exceed it.
- Ownership: You own the solar PV system. You are not leasing or in an agreement to purchase electricity generated by the system, such as a solar power purchase agreement (PPA).
How Does the Tax Credit Work?
As long as you are a U.S. homeowner and the solar panel system installed is for a residential location in the United States, you can claim the federal solar tax credit. The tax credit rolls over year after year if the taxes you owe are less than the credit you earn.
For example, if you have a solar system installed for $23,000, the 30% tax credit saves you $6,900 on your federal tax return the same year the system is activated.
What Does the Solar Tax Credit Cover?
According to the EERE, you can expense the following items through the federal solar tax credit:
- Panels: Panels can be solar PV panels or PV cells.
- Labor: Labor costs include on-site preparation, assembly, or original installation. These include the permitting fees, inspection costs, and developer fees.
- Additional equipment: The credit covers other components of the solar system, such as balance-of-system equipment, including wiring, inverters, and mounting equipment.
- Batteries: It covers any storage devices charged exclusively by your solar PV panels. This claim works even if the storage is activated in a subsequent tax year to when the solar energy system was installed. Storage devices are still subject to the installation date requirement, though. Beginning in 2024, you can receive the 30% credit for stand-alone energy storage devices even if they aren’t connected to a solar panel system.
- Sales tax: Any sales taxes on these eligible expenses is also covered.
Do Other Solar Incentives Affect the Federal Tax Credit?
Many state governments, municipalities, and local utility companies offer additional tax incentives to reduce solar costs. Here’s an overview of how these incentives affect the federal tax credit and your overall solar savings.
Utility Company Rebates
If you receive a subsidization from a utility company for installing a solar panel system, that payment is not considered taxable income. However, that credit reduces your solar installation costs, in turn reducing the total of your federal solar credit.
For example, if you receive a $1,500 credit for your $20,000 installation, you’ll pay $18,500. Your federal tax credit will be 30% of the new $18,500 total, reducing from $6,000 to $5,550. Note that you’ll still save more from claiming the subsidization, totaling $7,050 in savings.
Solar Renewable Energy Certificates
You earn a solar renewable energy credit (SREC) for every 1,000 kilowatt hours (kWh) or 1 megawatt hours (MWh) of electricity your system produces. Companies purchase these credits at market price. The money exchanged is taxable and goes toward your income. Your federal tax credit is not affected.
State Government Rebates
State government-issued rebates don’t affect your federal tax credit. Unlike utility rebates, these one-time rebates don’t reduce your total system costs.
State Tax Credit
State tax credits don’t affect your federal solar tax credit but do impact your taxable income. Because you have less state income tax to deduct, the taxable income on your federal taxes increases. The IRS has a $10,000 limit on combined state, local income, and property tax deductions. If a state offers a sizable solar tax credit, this could impact your federal tax liability.
How Do I Claim the Federal Solar Tax Credit?
You claim the solar tax incentive as part of your annual federal tax return with the Internal Revenue Service (IRS). But, first, check with your solar provider to receive the proper documentation and instructions on exactly how to claim the ITC as part of your installation. We have listed some of the most critical steps in the process below:
- Download IRS Form 5695 as part of your tax return.
- Calculate the credit on Part I of the tax form. You file your solar system as “qualified solar electric property costs.” On line 1, enter your overall project costs as written in your solar contract, then complete the calculations on lines 6a and 6b.
- On line 14, calculate any tax liability limitations using the IRS’s Residential Energy Efficient Property Credit Limit Worksheet. Then, complete the calculations on lines 15 and 16.
- Be sure to enter the figure from line 15 on your Schedule 3 (Form 1040), line 5.
We recommend that you consult a tax expert, as well as your solar provider, to ensure you are correctly claiming the federal solar tax. As a reminder, the tax credit only offsets the taxes you owe on your return. If the taxes you owe are less than the credit you earn, the credit will roll over year after year.
You may also file any sales and property tax exemptions that may be available in your state in addition to the ITC. Enter your zip code on the Database of State Incentives for Renewables & Efficiency to see what other rebates and state tax credits you can receive.
Our Recommendation
Overall, we suggest you work with a tax professional for tax advice. We also encourage you to utilize any resources provided by the IRS and the EERE to help claim the solar ITC. The federal solar tax credit is an excellent way to get money back on your solar panel installation, as long as you are claiming it correctly.
If you are still searching for a reputable and trustworthy solar installation company, we recommend getting quotes from top installation companies in your area.
Federal Solar Tax Credit FAQ
What is the 30% solar tax credit?
The solar tax credit, officially known as the Federal Tax Investment Credit (ITC), is issued by the federal government to homeowners who install new solar panel systems. You receive a tax deduction equal to 30% of your solar installation costs from 2022 to 2032. The rate will reduce to 26% in 2033 and drop to 22% in 2034. The credit is set to end on December 31, 2034.
How many times can you claim the solar tax credit?
You can claim the federal solar tax credit once. If you don’t have enough tax liability to use the total amount, the remaining balance will roll over to the next tax year.
Can I claim the federal solar tax credit if I’m not a homeowner?
Yes, there are particular circumstances when you can claim the federal tax credit if you’re not a homeowner. You must be a member of a condominium complex or a tenant stockholder of a cooperative housing corporation to be eligible for the credit.
Can I claim the federal solar tax credit for solar panels on my vacation home?
Yes, you can claim the solar tax credit for a vacation home, but the credit will be prorated based on the number of months you live there. For example, if your solar installation costs $25,000 and the credit is 30% of the cost, the total credit received will be $7,500. However, if you only live in the vacation home for three months of the year, the prorated credit will be $2,250.
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